Pension funds can’t invest in equity mutual funds, short-term debt

SummaryTightening the investment rules further, the Pension Fund Regulatory and Development Authority (PFRDA) on Monday barred fund houses from investing in equity-oriented mutual funds, exchange-traded funds (ETFs) and bonds with residual maturity of less than three years in a bid to shield subscribers to an extent from risks of market volatility.

Tightening the investment rules further, the Pension Fund Regulatory and Development Authority (PFRDA) on Monday barred fund houses from investing in equity-oriented mutual funds, exchange-traded funds (ETFs) and bonds with residual maturity of less than three years in a bid to shield subscribers to an extent from risks of market volatility.

However, the PFRDA allowed pension fund managers to invest in asset-backed securities with at least “AA” rating from two agencies as part of efforts to widen the investment horizon. “The revised investment guidelines for private sector NPS, fresh investments in equity-related mutual funds and exchange-traded funds are disallowed,” PFRDA said in a circular.

Debt securities selected for investments should have a minimum residual maturity period of three years from the date of investment by the pension fund managers (PFMs), it said. In March, the regulator allowed PFMs to invest directly in equities with a cap of 5% on sponsor group companies, 10% on other blue-chip shares and 15% in a particular industry. It also allowed PFMs to park money in fixed deposits of more than one-year maturity of financially sound banks as part of their investment in fixed-income instruments like investment grade bonds of corporates, infrastructure firms and municipalities.

Earlier, pension fund managers were allowed to invest only in equity index funds that replicated the Sensex and the Nifty. But the regulator had to change the investment rules as investing in equity indexes of mutual funds had become costlier owing to 1.5% expense ratio charged by fund houses. At present, the NPS corpus is managed by PFMs promoted by LIC, UTI AMC, SBI, ICICI Bank, Kotak Mahindra Bank and Reliance Capital. Since its inception in 2004, the NPS corpus has almost doubled to around R30,000 crore at end of 2012-13 from R15,163 crore in 2011-12.